Real estate transaction

A Real estate transaction is the process whereby a property (or designated real estate) is transferred between two or more parties, one being the seller(s) and the other being the buyer(s). It can often be quite complicated due to the size and complexity of the property being transferred, the large amounts of money being exchanged, and complex government regulations. Conventions and requirements also vary considerably among different countries of the world and among the various smaller legal entities with their specific requirements. In order to address some of these difficulties, a European Land Information Service (EULIS) was established in 2006, as a consortium of European National Land Registers. The aim of the service is to establish a single portal through which customers are provided with access to information about individual properties, about land and property registration services, and about the associated legal environment1.

In abstract terms, a real estate transaction, like other financial transactions, causes transaction costs. In order to identify and possibly reduce these transaction costs, the issue was addressed by the Organization for Economic Co-operation and Development (OECD) 2, through a study commissioned by the European Commission 3, and through a research action4.

The mentioned research action ‘Modelling Real Property Transactions’ investigated methods to describe selected transactions in a formal way, to allow for comparisons across countries (more precisely jurisdictions). Descriptions were performed both using a more simple format, a Basic Use Case template 56, and more advanced applications of the Unified Modelling Language 78. Process models were compared through an ontology-based methodology9, and national property transaction costs were estimated for Finland and Denmark 101112, based on the directions of the United Nations System of National Accounts13.

Contents

Residential examples

United States and Canada

The sale of a house in the United States or Canada might involve some or all of the following steps:

  • Hiring of a real estate broker to represent the seller and handle the logistics of the advertising and sale, except for "for sale by owner" properties where the owner(s) may consult legal counsel or obtain copies of a real estate contract.
  • A buyer may enter the picture in a variety of ways: from seeing advertisements in the media, seeing signs outside a property, or contacting a real estate agent to see a property.
  • A buyer may engage the services of a real estate broker to represent her/him and handle the logistics of finding suitable properties, enabling him/her to become qualified to buy, and the showing of appropriate properties.
  • Advertisement of the price and property details with a Multiple Listing Service, newspaper or web classified listing, lawn sign, or poster in the real estate office.
  • Private showings or general open house for interested buyers or buyers' real estate agents.
  • Interested buyers may get pre-approval for a mortgage of a certain amount from a bank, if they cannot afford the full purchase price in the range they are exploring.
  • Preparation of a written offer to purchase. If prepared by a real estate agent on behalf of the buyer, it is generally done on pre-printed and legally-approved forms provided by the real estate broker's office. An agent representing the buyer will advise his/her client as to the value of including specific contingency clauses such as time to obtain a mortgage commitment or to arrange for inspections. The buyer includes an earnest money payment check which accompanies the offer and which is generally not deposited until all parties are in agreement.
  • Submission of offers by interested buyers. Multiple offers may result in bidding, with best offer (not necessarily the highest bid) being awarded the sale. A single offer may often be below the initial asking price, resulting in negotiation between the buyer and seller over the final price, or possibly the rejection of the offer by the seller.
  • After acceptance of a particular offer, a real estate contract is ratified by all parties. It usually creates a short interim period (typically no more than 30 days, often much less) to allow the buyer to thoroughly inspect the property (often with the assistance of a professional home inspector).
  • Depending upon the jurisdiction and traditional practice, a title search is then ordered from a third party settlement or escrow company, pending final settlement.
  • An Appraisal, commissioned, as per custom, by the buyer or seller to determine the value of the building and land in order to satisfy the lender.
  • Depending upon how the contingency paragraphs are worded, if any defects are discovered during the inspection, the buyer may ask that they be repaired, ask that the sale price be lowered, or choose not to purchase the property.
  • The closing of the sale ends the escrow period and completes the transfer of ownership to the buyer. At this time, and all monies change hands and a number of closing costs are paid by the buyer or seller.
  • If as real estate broker is used in the transaction, closing is the time that payment is made to the brokers involved.

See also

Listing agreement

References

  1. ^ Aims of EULIS, European Land Information Service
  2. ^ Improving Competition in Real Estate Transactions, 2007
  3. ^ Conveyancing Services Market, 2007
  4. ^ Modelling Real Property Transactions, 2001-2005
  5. ^ Alistair A.R. Cockburn: Basic use case template
  6. ^ WG Law and Modelling: UseCase descriptions of Subdivision Procedures, 2002
  7. ^ Ferlan, Sumrada and Mattsson: Modelling property transactions, pp. 27 - 79 in: Real Property Transactions. Procedures, Transaction Costs and Models. Edited by: J. Zevenbergen, A. Frank and E. Stubkjær
  8. ^ Rados Sumrada: Modeling methodology for real estate transactions, 2005
  9. ^ Hess and Vaskovich: Ontology Engineering for Comparing Property Transactions, pp. 183 - 201, and Hess and Schlieder: Ontology-Based Development of Reference Processes, pp. 203- 219, both in: Real Property Transactions. Procedures, Transaction Costs and Models. Edited by: J. Zevenbergen, A. Frank and E. Stubkjær
  10. ^ Vitikainen: Transaction Costs Concerning Real Property - The Case of Finland, pp. 101 - 118 in: Real Property Transactions. Procedures, Transaction Costs and Models. Edited by: J. Zevenbergen, A. Frank and E. Stubkjær
  11. ^ Stubkjær: Accounting Costs of Transactions in Real Estate – The Case of Denmark. Nordic Journal of Surveying and Real Estate Research, 2:1 (2005) 11-36
  12. ^ Stubkjær, Lavrac and Gysting: Towards national real estate accounts: The case of Denmark and other European jurisdictions, pp. 119- 139 in: Real Property Transactions. Procedures, Transaction Costs and Models. Edited by: J. Zevenbergen, A. Frank and E. Stubkjær
  13. ^ UN System of National Accounts 1993

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  • This page was last modified on 2 November 2008, at 17:14.

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